GCL-Poly Rising: Q2 Turned Profitable, But Analysts Cautious

By Shuli Ren

GCL-Poly Energy (3800.HK), China’s largest maker of polysilicon which are used to make solar cells, returned to profit in the first half this year.

GCL reported that first-half profit was 900 million Hong Kong dollars, significantly higher than the HK$800 million+ the company had expected when it issued a profit alert on July 25. GCL’s shares jumped 4.1% by 1.30PM Hong Kong time.

Analysts remain cautious however.

Nomura Securities analyst Nitin Kumar is worried about GCL’s cash management. The company seems to be using its cash pile as a financing vehicle:

Working capital is being used as a financing vehicle that has reached very high levels.

GCL’s cash cycle at end 1H14 stands at negative 61 days (Accounts Receivables – 116 days, Inventory – 35.3 days, Accounts Payables – 212 days). This implies negative working capital of HK$2.18bn that is up from HK$1.02bn negative working capital at end-2013.

And is concerned that its captive power plant may be delayed again:

GCL now expects to be able to get COD (Commercial Operation Date) by end of 2014F. GCL last year guided for COD in 1Q14 which was pushed out to May-end and then again to July-end.

We are not experts in gas or coal fired co-generation plants, but looking at the data from EIA, it does not look like a simple fix given that coal emissions are a multiple higher.

Deutsche Bank analysts Eric Cheng and Michael Tong are worried about the same thing:

It seems that commissioning of the captive power plant will be further delayed until end-2014, as GCL said the plant is still under verification process at the national level. With ASP starting to decline in March, we see some downside on ASP in 2H (polysilicon and wafer ASP was down 8-11% from its peak in mid-March), particularly if China demand does not pick up as expected.

But most importantly, with the stock now trading at 21 times 2014 earnings and 2.3 times 2014 book, it is just not cheap, added the Deutsche analysts.

About Asia Stocks to Watch

Barrons.com’s Asia Stocks to Watch blog analyses news and research from this vibrant and diverse continent, challenges conventional wisdom, and discusses investment ideas from Shanghai to Singapore, and from Indonesia to India.

Shuli Ren has written for Dow Jones Newswires on corporate strategies and Asia markets. Before becoming a journalist, Shuli conducted quantitative equity research at Lehman Brothers, and later Barclays Capital. She was also a consultant for Charles River Associates. She holds a CFA and FRM and studied economics at the University of Chicago’s graduate school.